**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**Quarterly Report Under Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended January 31,2006**

 

**Commission File No. 1-8125**

 

**TOROTEL, INC.**

(Exact name of small business issuer as specified in its charter)

 

| **MISSOURI**                    | ** ** | **44-0610086**                       |
|---------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |       |                                 |

 

**620 NORTH LINDENWOOD DRIVE, OLATHE, KANSAS  66062**

(Address of principal executive offices)

 

**(913) 747-6111**

(Issuer’s telephone number)

 

**NONE**

(Former name, former address and former fiscal year, if changed sincelast report)

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes  ý   No  o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.)

 

Yes  o   No  ý

 

As of March 8, 2006,there were 5,111,590 shares of Common Stock, $.01 par value, outstanding.

 

 

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TOROTEL, INC. AND SUBSIDIARIES

 

INDEX

 
| PART I.  | FINANCIAL INFORMATION                                                                       |   |
|---------------|---------------------------------------------------------------------------------------------|--------|
|          |                                                                                        |   |
| Item 1.       | Financial Statements                                                                        |   |
|          |                                                                                        |   |
|          | Consolidated Balance Sheet  as of January 31, 2006                                     |   |
|          |                                                                                        |   |
|          | Consolidated Statements of  Operations for the nine months ended January 31, 2006 and 2005  |   |
|          |                                                                                        |   |
|          | Consolidated Statements of  Operations for the three months ended January 31, 2006 and 2005 |   |
|          |                                                                                        |   |
|          | Consolidated Statements of  Cash Flows for the nine months ended January 31, 2006 and 2005  |   |
|          |                                                                                        |   |
|          | Notes to Consolidated  Financial Statements                                                 |   |
|          |                                                                                        |   |
| Item 2.       | Management’s Discussion and Analysis or Plan of  Operation                             |   |
|          |                                                                                        |   |
| Item 3.       | Controls and Procedures                                                                     |   |
|          |                                                                                        |   |
| PART II. | OTHER INFORMATION                                                                           |   |
|          |                                                                                        |
| Item 4.       | Submission of Matters to a Vote of Security Holders                                         |   |
|          |                                                                                        |   |
| Item 6.       | Exhibits and Reports on Form 8-K                                                       |   |
|          |                                                                                        |
| SIGNATURES    |                                                                                        |
|               |                                                                                             |        |  |  |

 

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PART I.               FINANCIAL INFORMATION

 

Item 1.                       Financial Statements

 

CONSOLIDATED BALANCESHEET (Unaudited)

As of January 31,2006

 
| ASSETS                                           |   |        |      |
|--------------------------------------------------|--------|-------------|-----------|
|                                             |   |        |      |
| Current assets:                                  |   |        |      |
| Cash                                             |   | $           | 674,000   |   |
| Accounts receivable, net                         |   | 471,000     |      |
| Inventories                                      |   | 396,000     |      |
| Prepaid expenses and other current assets        |   | 26,000      |      |
|                                             |   | 1,567,000   |      |
|                                             |   |        |      |
| Property, plant  and equipment, net              |   | 1,073,000   |      |
|                                             |   |        |      |
| Other assets                                     |   | 13,000      |      |
| Equity  investment                               |   | —      |      |
| Intangible  assets, net                          |   | 712,000     |      |
|                                             |   |        |      |
|                                             |   | $           | 3,365,000 |   |
|                                             |   |        |      |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY       |   |        |      |
|                                             |   |        |      |
| Current  liabilities:                            |   |        |      |
| Current maturities of long-term debt             |   | $           | 80,000    |   |
| Trade accounts payable                           |   | 176,000     |      |
| Accrued liabilities                              |   | 220,000     |      |
| Accrued interest on note payable to shareholders |   | 5,000       |      |
|                                             |   | 481,000     |      |
|                                             |   |        |      |
| Long-term debt,  less current maturities         |   | 769,000     |      |
|                                             |   |        |      |
| Note payable to  shareholders                    |   | 750,000     |      |
|                                             |   |        |      |
| Stockholders’  equity:                      |   |        |      |
| Common stock, at par value                       |   | 52,000      |      |
| Capital in excess of par value                   |   | 12,362,000  |      |
| Accumulated deficit                              |   | (10,844,000 | )         |
|                                             |   | 1,570,000   |      |
| Less treasury stock, at cost                     |   | 205,000     |      |
|                                             |   | 1,365,000   |      |
|                                             |   |        |      |
|                                             |   | $           | 3,365,000 |   |

 

The accompanying notes are an integral part of this statement.

 

1

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CONSOLIDATED STATEMENTSOF OPERATIONS (Unaudited)

Nine Months Ended January 31,

 
| ** **                                        | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------------------|------------|-----------|------------|-----------|------------|
| Net sales                                         |       | $         | 4,090,000  |      | $          | 3,297,000 |   |
| Cost of goods  sold                               |       | 2,337,000 |       | 2,103,000 |       |
|                                              |       |      |       |      |       |
| Gross profit                                      |       | 1,753,000 |       | 1,194,000 |       |
|                                              |       |      |       |      |       |
| Operating  expenses:                              |       |      |       |      |       |
| Engineering                                       |       | 191,000   |       | 152,000   |       |
| Selling, general and administrative               |       | 1,106,000 |       | 859,000   |       |
| Amortization of intangible assets                 |       | 58,000    |       | 64,000    |       |
|                                              |       | 1,355,000 |       | 1,075,000 |       |
|                                              |       |      |       |      |       |
| Earnings from operations                          |       | 398,000   |       | 119,000   |       |
|                                              |       |      |       |      |       |
| Other expense  (income):                          |       |      |       |      |       |
| Interest expense                                  |       | 89,000    |       | 102,000   |       |
| Equity in loss of investee                        |       | —    |       | 139,000   |       |
| Impairment of real estate                         |       | 36,000    |       | —    |       |
| Gain on settlement of debt                        |       | (35,000   | )          | —    |       |
| Gain on sale of real estate                       |       | (110,000  | )          | —    |       |
| Other, net                                        |       | —    |       | 1,000     |       |
|                                              |       | (20,000   | )          | 242,000   |       |
|                                              |       |      |       |      |       |
| Earnings (loss) before provision for income taxes |       | 418,000   |       | (123,000  | )          |
|                                              |       |      |       |      |       |
| Provision for  income taxes                       |       | —    |       | —    |       |
|                                              |       |      |       |      |       |
| Net earnings  (loss)                              |       | $         | 418,000    |      | $          | (123,000 | ) |
|                                              |       |      |       |      |       |
| Basic and  diluted earnings (loss) per share      |       | $         | .08        |      | $          | (.02 | ) |

 

The accompanying notes are an integral part of these statements.

 

2

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CONSOLIDATED STATEMENTSOF OPERATIONS (Unaudited)

Three Months Ended January 31,

 
| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                  |       | $        | 1,376,000  |     | $          | 1,125,000 |   |
| Cost of goods  sold                        |       | 849,000  |       | 653,000  |       |
|                                       |       |     |       |     |       |
| Gross profit                               |       | 527,000  |       | 472,000  |       |
|                                       |       |     |       |     |       |
| Operating  expenses:                       |       |     |       |     |       |
| Engineering                                |       | 69,000   |       | 50,000   |       |
| Selling, general and administrative        |       | 348,000  |       | 297,000  |       |
| Amortization of intangible assets          |       | 21,000   |       | 28,000   |       |
|                                       |       | 438,000  |       | 375,000  |       |
|                                       |       |     |       |     |       |
| Earnings from operations                   |       | 89,000   |       | 97,000   |       |
|                                       |       |     |       |     |       |
| Other expense:                             |       |     |       |     |       |
| Interest expense                           |       | 27,000   |       | 33,000   |       |
| Equity in loss of investee                 |       | —   |       | 63,000   |       |
| Other, net                                 |       | —   |       | 1,000    |       |
|                                       |       | 27,000   |       | 97,000   |       |
|                                       |       |     |       |     |       |
| Earnings before provision for income taxes |       | 62,000   |       | —   |       |
|                                       |       |     |       |     |       |
| Provision for  income taxes                |       | —   |       | —   |       |
|                                       |       |     |       |     |       |
| Net earnings                               |       | $        | 62,000     |     | $          | — |   |
|                                       |       |     |       |     |       |
| Basic and  diluted earnings per share      |       | $        | .01        |     | $          | — |   |

 

The accompanying notes are an integral part of these statements.

 

3

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CONSOLIDATED STATEMENTSOF CASH FLOWS (Unaudited)

Nine Months Ended January 31,

 
| ** **                                                                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                                                |       |     |       |     |       |
| Net earnings (loss)                                                                                   |       | $        | 418,000    |     | $          | (123,000 | ) |
| Adjustments to reconcile net earnings (loss) to net  cash provided by (used in) operating activities: |       |     |       |     |       |
| Gain on sale of real estate                                                                           |       | (110,000 | )          | —   |       |
| Gain on settlement of debt                                                                            |       | (35,000  | )          | —   |       |
| Impairment of real estate                                                                             |       | 36,000   |       | —   |       |
| Equity in loss of investee                                                                            |       | —   |       | 139,000  |       |
| Depreciation and amortization                                                                         |       | 112,000  |       | 113,000  |       |
| Disposition of assets                                                                                 |       | —   |       | 1,000    |       |
| Change in value of stock appreciation rights                                                          |       | 30,000   |       | —   |       |
| Increase (decrease) in cash flows from operations  resulting from changes in:                         |       |     |       |     |       |
| Accounts receivable                                                                                   |       | 206,000  |       | (285,000 | )          |
| Inventories                                                                                           |       | (124,000 | )          | (34,000  | )          |
| Prepaid expenses and other assets                                                                     |       | (6,000   | )          | 4,000    |       |
| Trade accounts payable                                                                                |       | 37,000   |       | (246,000 | )          |
| Accrued liabilities                                                                                   |       | 40,000   |       | 110,000  |       |
|                                                                                                  |       |     |       |     |       |
| Net cash  provided by (used in) operating activities                                                  |       | 604,000  |       | (321,000 | )          |
|                                                                                                  |       |     |       |     |       |
| Cash flows from  investing activities:                                                                |       |     |       |     |       |
| Capital expenditures                                                                                  |       | (72,000  | )          | (32,000  | )          |
| Net proceeds from sale of asset                                                                       |       | 317,000  |       | —   |       |
|                                                                                                  |       |     |       |     |       |
| Net cash  provided by (used in) investing activities                                                  |       | 245,000  |       | (32,000  | )          |
|                                                                                                  |       |     |       |     |       |
| Cash flows from  financing activities:                                                                |       |     |       |     |       |
| Principal payments on long-term debt                                                                  |       | (368,000 | )          | (39,000  | )          |
|                                                                                                  |       |     |       |     |       |
| Net cash used in  financing activities                                                                |       | (368,000 | )          | (39,000  | )          |
|                                                                                                  |       |     |       |     |       |
| Net increase  (decrease) in cash                                                                      |       | 481,000  |       | (392,000 | )          |
| Cash, beginning  of period                                                                            |       | 193,000  |       | 532,000  |       |
|                                                                                                  |       |     |       |     |       |
| Cash, end of  period                                                                                  |       | $        | 674,000    |     | $          | 140,000 |   |
|                                                                                                  |       |     |       |     |       |
| Supplemental  Disclosures of Cash Flow Information                                                    |       |     |       |     |       |
| Cash paid during the period for:                                                                      |       |     |       |     |       |
| Interest                                                                                              |       | $        | 89,000     |     | $          | 102,000 |   |
| Income taxes payable                                                                                  |       | $        | —     |     | $          | — |   |

 

The accompanying notes are an integral part of these statements.

 

4

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NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (Unaudited)

 

Note 1 - Basis ofPresentation

 

Torotelspecializes in the custom design and manufacture of a wide variety of precisionmagnetic components, consisting of transformers, inductors, reactors, chokesand toroidal coils, for use in commercial, industrial and military electronics.Torotel also designs and distributes ballast transformers for the airlineindustry. Approximately 98% of Torotel’s sales during the first nine months offiscal 2006 have been derived from domestic customers. The accompanyingunaudited consolidated financial statements reflect the normal recurringadjustments, as well as an adjustment to reflect real estate held for sale tothe net realizable value, which in the opinion of management are necessary topresent fairly Torotel’s financial position at January 31, 2006, and theresults of operations for the nine months ended January 31, 2006.

 

Thefinancial statements contained herein should be read in conjunction withTorotel’s financial statements and related notes filed on Form 10-KSB forthe year ended April 30, 2005.

 

Note 2 - Inventories

 

Thecomponents of inventories are summarized as follows:

 
| Raw materials   |   | $       | 57,000  |   |
|-----------------|--------|---------|---------|--------|
| Work in process |   | 250,000 |    |
| Finished goods  |   | 89,000  |    |
|            |   | $       | 396,000 |   |

 

Note 3 – FinancingAgreement

 

On September 30,2005, Torotel Products renewed its $200,000 revolving credit agreement withBank of Blue Valley. Advances under the credit line are limited to 75% ofeligible billed receivables. The revolving line is collateralized by the landand buildings in Olathe, Kansas. Under the terms of the agreement, theoutstanding balance of the revolving line bears interest at 1.5% over the bank’scorporate base rate and has a maturity date of September 30, 2006. As of January 31,2006, the effective borrowing rate was 9% and the entire credit line wasavailable.

 

Note 4 - Employee StockOptions

 

Inaccordance with the Incentive Compensation Plan approved by shareholders in1994, Torotel reserved 400,000 common shares for issuance to key employeespursuant to the exercise of incentive and non-qualified stock options grantedprior to June 20, 2004. The options are accounted for under APB Opinion25, *Accounting for Stock Issued to Employees*,and related interpretations. The incentive stock options have a term of fiveyears when issued and vest 50% per year at the end of each of the first twoyears. The non-qualified stock options have a term of ten years when issued andvest 25% per year at the end of each of the first four years. The exerciseprice of each option equals the market price of Torotel’s common stock on thedate of grant. Accordingly, no compensation cost has been recognized for thePlan.

 

Thefair value of the incentive stock options granted was estimated on the date ofgrant using the Black-Scholes options-pricing model. The fair value of theoptions was determined using the following weighted

 

5

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average assumptions: nodividend payments over the life of the options; expected volatility of 551.0%;risk-free interest rate of 3.50%; and expected life of five years.

 

Stockoption transactions under the 1994 Incentive Compensation Plan for each periodthrough January 31 are summarized as follows:

 
| ** **                                                      | ** ** | **2006**                            | ** ** | **2005**                     | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                      | ** ** | **Weighted  Shares  Under  Option** | ** ** | **Average  Exercise  Price** | ** ** | **Weighted  Shares  Under  Option** | ** ** | **Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of period                             |       | 40,000                              |       | $                            | .37        |   | 40,000 |   | $ | .37 |   |
| Granted                                                         |       | —                              |       | —                       |       | — |   | — |   |
| Exercised                                                       |       | —                              |       | —                       |       | — |   | — |   |
| Forfeited                                                       |       | —                              |       | —                       |       | — |   | — |   |
| Outstanding at  end of period                                   |       | 40,000                              |       | $                            | .37        |   | 40,000 |   | $ | .37 |   |
|                                                            |       |                                |       |                         |       |   |   |   |   |   |   |
| Options  exercisable at end of period                           |       | 40,000                              |       | $                            | .37        |   | 40,000 |   | $ | .37 |   |
| Weighted average fair value of options granted  during the year |       | —                              |       | —                       |       |   |   |   |   |

 

The following informationapplies to options outstanding for each period through January 31:

 
| ** **                                   | ** ** | **2006** | ** ** | **2005**  | ** ** |
|----------------------------------------------|------------|----------|------------|-----------|------------|
| Number  outstanding                          |       | 40,000   |       | 40,000    |       |
| Range of  exercise prices                    |       | $        | .37        |      | $          | .37 |   |
| Weighted average  exercise price             |       | $        | .37        |      | $          | .37 |   |
| Weighted average  remaining contractual life |       | .75 yrs. |       | 1.75 yrs. |       |

 

Note 5 - Earnings PerShare

 

Statementof Financial Accounting Standards (SFAS) No. 128, *Earnings per Share*, requires dualpresentation of basic and diluted EPS on the face of the statement of earningsregardless of whether basic and diluted EPS are the same; and requires areconciliation of the numerator and denominator used in computing basic anddiluted EPS. Basic EPS excludes dilution and is computed by dividing earnings availableto common stockholders by the weighted average number of common sharesoutstanding for the period. Diluted EPS is computed similarly to fully dilutedEPS pursuant to APB Opinion 15. Diluted EPS reflects the potential dilutionthat could occur if securities or other contracts to issue common stock wereexercised or converted into common stock or resulted in the issuance of commonstock that then shared in the earnings of the entity. Pursuant to SFAS No. 128,the basic and diluted earnings per common share were computed as follows:

 

6

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# **Year-to-DateEPS Calculations**

# ** **

| ** **                                   | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------|------------|
| Net earnings  (loss)                         |       | $         | 418,000    |      | $          | (123,000 | ) |
| Weighted average  common shares outstanding  |       | 5,111,590 |       | 5,111,590 |       |
| Incremental  shares                          |       | 4,790     |       | —    |       |
|                                         |       |      |       |      |       |
| Basic and diluted  earnings (loss) per share |       | $         | .08        |      | $          | (.02 | ) |

 

No incremental shares are included in the 2005 year-to-date EPScalculations for the 40,000 shares under option since the effect would beanti-dilutive.

 

Quarterly EPS Calculations

 
| ** **                                  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------------|------------|-----------|------------|-----------|------------|
| Net earnings                                |       | $         | 62,000     |      | $          | — |   |
| Weighted average  common shares outstanding |       | 5,111,590 |       | 5,111,590 |       |
| Incremental  shares                         |       | 14,658    |       | —    |       |
|                                        |       |      |       |      |       |
| Basic and  diluted earnings per share       |       | $         | .01        |      | $          | — |   |

 

There were no anti-dilutive incremental shares in 2005 because the averagemarket price of the common stock was less than the exercise price.

 

Note 6 - Amortization ofIntangibles

 

Since the acquisition ofElectronika primarily involved the purchase of certain technology-basedintangible assets, annual reviews have been performed to determine the amountof any impairment. The remaining carrying value of these intangible assets isestimated at $712,000 and is supported by the projected amount recoverable fromthe selling shareholders of Electronika (the Caloyeras Family Partnership). Theselling shareholders contractually guaranteed that the aggregate sales fromElectronika’s existing ballast designs over the first five (5) full fiscalyears, specifically fiscal years 2003-2007, would be at least $2,500,000, whichbased on the terms of the Manufacturing Agreement with Magnetika, Inc.,would result in an aggregate gross profit of $1,500,000 before any operatingexpenses. Aggregate sales since fiscal 2003 have been $1,269,000.

 

The following tableprovides the adjusted gross carrying value and accumulated amortization foreach major class of intangible asset based on Torotel’s reassessment ofpreviously recognized intangible assets in accordance with the adoption ofStatement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*:

 
| ** **           | ** ** | ** **                     | ** ** | **2006**                    | ** ** | **2005**                      | ** ** |
|----------------------|------------|--------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **           | ** ** | **Average  Amortizable  Life** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Aircraft -  ballasts |       | 3                              |       | $                           | 1,148,000  |                          | $          | 436,000 |   | $ | 1,148,000 |   | $ | 351,000 |   |
|                      |            |                                |            |                             |            |                               |            |  |  |  |  |  |  |  |  |

 

The totalintangible amortization expense for the nine months ended January 31, 2006and 2005 was $58,000 and $64,000, respectively. The estimated aggregateamortization expense for each of the next two years is as follows:

 

| **April 30,** | ** ** | **Amount** | ** ** |
|--------------------|------------|------------|------------|
| 2006               |       | $          | 79,000     |   |
| 2007               |       | 63,000     |       |
|               |       | $          | 142,000    |   |

 

7

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The remaining book valueof approximately $628,000 at April 30, 2007, represents the amountrecoverable from the former shareholders, and is based on the estimated salesfrom the aforementioned ballast designs.

 

Note 7 – StockAppreciation Rights (SARs)

 

On September 10, 2004, the board of directors ofTorotel approved the Directors Stock Appreciation Rights Plan (the “Plan”) fornon-employee directors. Each SAR is equal to one share of common stock ofTorotel, and the aggregate number of SARs that may be granted under thePlan shall not exceed 500,000. The effective date of the Plan is October 1,2004. The SARs are accounted for under Statement of Financial AccountingStandards No. 123, *Accounting forStock-Based Compensation.*

 

Pursuantto the Plan, 20,000 SARs were granted on the effective date to each of thethree current non-employee directors. The initial price at which each SAR wasgranted was $.35, which equals the market price of Torotel’s common stock onthe date of grant. Accordingly, no compensation cost was recognized at the timeof grant, but compensation costs will be recognized in future periods in whichthe market price of Torotel’s common stock increases above the grant price.

 

SARs shall automaticallybe granted in the future as follows: (1) each person who is elected as adirector, who was not a director on the effective date of the Plan, shall begranted 10,000 SARs on the date such person is elected a director; and (2) oneach May 1 following the effective date during the term of the Plan, eachperson serving as a director on such date shall be granted 10,000 SARs. Afterthe initial grant, the price at which each SAR is granted shall be the averageof the closing price of Torotel’s common stock for the ten consecutive daysimmediately preceding the date of grant. Upon exercise of a SAR, Torotel willpay the grantee an amount (the “Spread”) equal to the excess of the ExercisePrice over the SAR grant price multiplied by the number of shares beingexercised. The Exercise Price shall be the average of the closing price ofTorotel’s common stock for the ten consecutive days immediately preceding thenotice of exercise. For any payments that exceed $10,000, Torotel has theoption to make quarterly payments over three years with interest payablequarterly at the prime rate of Torotel’s primary bank.

 

EachSAR granted hereunder may be exercised to the extent that the Grantee isvested in such SAR. The SARs will vest according to the following schedule:

 
| **Number of Years the Grantee has remained  a director of the Company following  the Date of Grant** | ** ** | **Shares represented  by a SAR in which  a Grantee is Vested** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| Under one                                                                                            |       | 0                                                              | %          |
| At least one but  less than two                                                                      |       | 33                                                             | %          |
| At least two but  less than three                                                                    |       | 67                                                             | %          |
| Three or more                                                                                        |       | 100                                                            | %          |

 

A Grantee shall becomefully (100%) vested in each of his or her SARs under the followingcircumstances:  (i) upon terminationof the Grantee’s service as a director of the Company for reasons of death, disabilityor retirement; (ii) if the Compensation and Nominating Committee (the “Committee”),in its sole discretion, determines that acceleration of the SAR vesting schedule wouldbe desirable for the Company; or (iii) if the

 

Company shall, pursuantto action by its Board of Directors, at any time propose to merge into,consolidate with, or sell or otherwise transfer all or substantially all of itsassets to another corporation, and provision is not made pursuant to the termsof such transaction for the assumption by the surviving, resulting or acquiringcorporation of outstanding SARs or for substitution of new SARs therefore, theCommittee shall cause written

 

8

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notice of the proposedtransaction to be given to each Grantee not less than twenty days prior to theanticipated effective date of the proposed transaction, and his or her SARsshall become fully (100%) vested and, prior to a date specified in such notice,which shall be not more than ten days prior to the anticipated effective dateof the proposed transaction, each Grantee shall have the right to exercise hisor her SARs.

 

SARs transactions foreach period though January 31 are summarized as follows:

 
| ** **                                                     | ** ** | **2006**                          | ** ** | **2005**                  | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------|------------|
| ** **                                                     | ** ** | **Weighted  SARs  Under  Option** | ** ** | **Average  Grant  Price** | ** ** | **Weighted  SARs  Under  Option** | ** ** | **Average  Grant  Price** | ** ** |
| ** **                                                     | ** ** | ** **                        | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding at  beginning of period                            |       | 60,000                            |       | $                         | .350       |   | — |   | — |   |
| Granted                                                        |       | 30,000                            |       | $                         | .302       |   | 60,000 |   | $ | .350 |   |
| Exercised                                                      |       | —                            |       | —                    |       | — |   | — |   |
| Forfeited                                                      |       | —                            |       | —                    |       | — |   | — |   |
| Outstanding at  end of period                                  |       | 90,000                            |       | $                         | .334       |   | 60,000 |   | $ | .350 |   |
|                                                           |       |                              |       |                      |       |   |   |   |   |
| SARs exercisable  at end of period                             |       | 20,000                            |       | $                         | .350       |   | — |   | — |   |
| Weighted average fair value of SARs granted during  the period |       |                              |       | $                         | .705       |   |   |   | — |   |

 

The following informationapplies to SARs outstanding for each period through January 31:

 
| ** **                                   | ** ** | **2006**      | ** ** | **2005**  | ** ** |
|----------------------------------------------|------------|---------------|------------|-----------|------------|
| Number  outstanding                          |       | 90,000        |       | 60,000    |       |
| Range of grant  prices                       |       | $.302 - $.350 |       | $.350     |       |
| Weighted average  grant price                |       | $.334         |       | $.350     |       |
| Weighted average  remaining contractual life |       | 8.86 yrs.     |       | 9.67 yrs. |       |

 

Total compensationexpense for the outstanding SARs, as if fully vested, was $14,000 and $30,000for the three and nine months ended January 31, 2006, respectively. Thethree months ended July 31, 2005, included a $3,000 reduction incompensation expense to reduce the related liability to zero as the grant priceexceeded the exercise price.

 

Note 8 – Gain onSettlement of Debt

 

Other income as presented in the accompanyingconsolidated statements of operations for the nine months ended January 31,2006, includes a net gain of $35,000 resulting from the settlement of an oldliability at an amount lower than originally recorded.

 

Note 9 – Grandview,Missouri Real Estate

 

Prior to moving toOlathe, Kansas in March 2004, Torotel previously occupied a two-buildingcomplex with approximately 29,000 square feet located in Grandview, Missouri. Thisproperty was split into two parcels, one consisting of a 24,000 square footbuilding on a 1.72-acre lot (“Lot No. 1”), and the other

 

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consisting of a 5,000square foot building on an .88-acre lot (“Lot No. 2”). On July 20,2005, Torotel closed on the sale of Lot No. 2 at a contract price of$225,000. The sale resulted in net proceeds of $205,000 and a net gain of$105,000, which is presented in other income in the accompanying consolidatedstatements of operations for the nine months ended January 31, 2006.

 

Torotel had entered into a real estate contract tosell Lot No. 1 at a gross selling price of $175,000, with closingscheduled for no later than September 1, 2005. Upon completion of the50-day inspection period, the buyer rescinded his original offer of $175,000and countered at a price of $125,000, which Torotel accepted in order toeliminate the costs for real estate taxes, property and casualty insurance, andutilities. In doing so, Torotel recorded an impairment charge of $36,000, whichis presented in other expense in the accompanying consolidated statements ofoperations for the nine months ended January 31, 2006. Closing on the saletook place on September 16, 2005, with Torotel receiving net proceeds fromthe sale of  $112,000. The sale resultedin a net gain of $5,000, which is presented in other income in the accompanyingconsolidated statements of operations for the nine months ended January 31,2006.

 

Note 10 – Concentrationsof Credit Risk

 

At various times and at January 31,2006, Torotel maintained cash in bank balances that exceed the federallyinsured limits.

 

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Item 2.                       Management’sDiscussion and Analysis or Plan of Operation

 

Overview

 

Torotel, Inc. (“Torotel”)conducts business primarily through two wholly owned subsidiaries, TorotelProducts, Inc. (“Torotel Products”) and Electronika, Inc. (“Electronika”).In addition, Torotel has a 15.27% equity interest in Apex Innovations, Inc.(“Apex”).

 

Torotel Products designsand manufactures a wide variety of magnetic components for use in military,aerospace and industrial electronic applications. These magnetic components,which consist of transformers, inductors, reactors, chokes, and toroidal coils,are used to modify and control electrical voltages and currents in electronicdevices. For example, if equipment containing one of these components receivesan electrical voltage or current which is too high for proper operation of theequipment, the component would modify and control the electrical voltage orcurrent to allow proper operation of the equipment. While Torotel Productsprimarily manufactures the components in accordance with pre-developedmechanical and electrical requirements, in some cases it will be responsiblefor both the overall design and manufacture of the components. The magneticcomponents are sold to manufacturers who incorporate them into an end product. Themajor applications include aircraft navigational equipment, voice and datasecure communications, medical equipment, avionics equipment, and conventionalmissile guidance systems.

 

Torotel Products marketsits components primarily through a 3-person internal sales force and twoindependent manufacturers’ representatives paid on a commission basis. In June 2005,Torotel Products added a design engineer with sales experience (formerly withStandex Electronics) for the purpose of expanding its reach into new marketsand/or customers. The plan is to have the 4-person engineering departmentbecome more active in the sales and marketing efforts. An incentive program hasbeen developed in this regard for all engineering personnel to earn acommission on new product sales to existing, as well as new customers.

 

Torotel Products is anapproved source for magnetic components used in numerous military and aerospacesystems, which means Torotel Products is automatically solicited for any procurementneeds for such applications. The magnetic components manufactured by TorotelProducts are sold primarily in the United States, and most sales are awarded ona competitive bid basis. The markets in which Torotel Products competes arehighly competitive. A substantial number of companies sell components of thetype manufactured and sold by Torotel Products. In addition, Torotel Productssells to a number of customers who have the capability of manufacturing theirown electronic components. The principal methods of competition for electronicproducts in the markets served by Torotel Products include, among otherfactors, price, on-time delivery performance, lead times, customized productengineering and technical support, marketing capabilities, quality assurance,manufacturing efficiency, and existing relationships with customers’ engineers.While magnetic components are not susceptible to rapid technological change,Torotel Products’ sales, which do not represent a significant share of theindustry’s market, are susceptible to decline given the highly competitivenature of the market.

 

Electronika is amarketing and licensing company selling ballast transformers to the airlineindustry. These transformers activate and control the lights in commercial airplanecockpits. Electronika’s ballast transformers are approved as spare andreplacement parts in DC-8, DC-9, DC-10, MD-80, and MD-88 aircraft. However,sales of ballast transformers have been made primarily for use in DC-8 and DC-9aircraft. As a result, the business of Electronika is subject to various risksincluding, without limitation, any decline in use of the referenced aircraft,and competition for the available spare

 

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parts business. Electronika’s sales do not represent asignificant portion of any particular market. Electronika’s requirements forthe ballast transformers are outsourced pursuant to a Manufacturing Agreementwith Magnetika, Inc. (“Magnetika”), a corporation owned by Peter B.Caloyeras and his family. Under the terms of the agreement, Magnetika providesall necessary raw material, labor, testing, packaging and related servicesrequired to complete the manufacture, delivery and sale of the ballasttransformers. Electronika retains ownership of all designs, drawings,specifications and intellectual property rights associated with the ballasttransformers. Due to lower than anticipated sales for Electronika, the carryingvalue of the intangible assets of Electronika is now $712,000. These intangibleassets are being partially amortized over the next two fiscal years. At April 30,2007, the remaining value of the intangible assets is expected to beapproximately $628,000, which will represent the projected amount recoverablepursuant to the sales guarantee provided by the selling shareholders ofElectronika. The recoverable amount will reduce the $750,000 note payable toshareholders, who are also the owners of Magnetika. Magnetika is amanufacturing company that, in addition to the aforementioned ballasttransformers, manufacturers various other products similar to those of Torotelfor other unrelated customers. Magnetika’s annual sales are estimated to beapproximately two to three times the annual sales of Torotel. Total purchasesfrom Magnetika by Electronika amounted to $61,000 for the nine months ended January 31,2006.

 

Torotel’smanagement is not involved in the daily operations of Apex. Dale H. Sizemore, Jr.,Torotel’s chairman and chief executive officer, served as a member of Apex’sboard of directors from March 2002 until his resignation in October 2004.***i***-**INFO** is Apex’s umbrella term for afoundational system architecture of patented information management softwareproducts created by Apex primarily for government entities. The success of Apexdepends, among other things, on its ability to market its products togovernment entities. The investment in Apex has no carrying value on theconsolidated balance sheet of Torotel, and in the opinion of Torotelmanagement, it is not likely that any of the investment will be recoveredbecause of Apex’s continued financial losses. If Apex were to become profitableand eventually be sold, any cash recovered would be recognized as a gain uponreceipt of the proceeds.

 

Business Outlook

 

Torotel Products projected an overall increase in new order bookings of 28% for fiscal year 2006. The rate of new order bookings during the first nine months of fiscal 2006 was up 77%. The rate for magnetics was up 17%, with the balance of the bookings increase represented by $1,513,000 in contracts received for the potted coil assembly, and a $49,000 order received for two capacitor assemblies, which are new jobs for Torotel Products. As a result, the order backlog was 40% higher than a year ago. The primary factors that drive gross profit and net earnings for Torotel Products are sales volume and product mix. The gross profits on mature products/programs and larger transformer devices tend to be higher than those that are still in the prototyping or early production stages and simpler inductor devices. As a result, in any given accounting period the mix of product shipments between higher and lower margin jobs has a significant impact on the gross profit and net earnings of Torotel Products.

 

Electronika’s overall sales will continue to be impacted by the decline in the number of active DC-8 and DC-9 aircraft.

 

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Results of Operations

 

Thefollowing management comments regarding Torotel’s results of operations andoutlook should be read in conjunction with the Consolidated FinancialStatements included pursuant to Item 1 of this Quarterly Report.

 

Thediscussion and analysis of the results of operations include the operations ofTorotel, Inc. and its subsidiaries, Torotel Products, Inc. andElectronika, Inc. While each company’s results are included in thefollowing discussion, segment reporting is not applicable because the productsoffered are similar in form and function, and target similar markets.

 

NineMonths Ended January 31, 2006 Compared With Nine Months Ended January 31,2005

 

Net sales increased 24%. The net sales of Torotel Products increased 25% from $3,155,000 to $3,938,000. This increase is attributable to higher demand for molded coils used in down-hole drilling applications, higher shipments of the potted coil assembly for the Hellfire II missile system, higher demand from other segments of the military, and shipments of the new capacitor assemblies. The net sales of Electronika increased 7% from $142,000 to $152,000.

 

Gross profit as apercentage of net sales increased nearly 7%. The gross profit percentage ofTorotel Products increased 7% primarily because of higher sales volume withouta comparable increase in fixed production costs, and lower labor costs due tohigher levels of overtime and inefficiencies encountered with the training ofnew production personnel in first half of last year, which was in conjunctionwith the move to Olathe. These benefits were offset partially by higher materialcosts incurred on certain products shipped to a major customer in the thirdfiscal quarter of fiscal 2006 whereby the selling price was negotiated in 2002as part of a multi-year price agreement that expires March 31, 2006. TorotelProducts has submitted new pricing for these products, which if accepted, willbecome part of a new multi-year agreement. Electronika’s gross profit as apercentage of net sales remained unchanged.

 

Engineering expenses, applicable only to TorotelProducts, increased nearly 26% from $152,000 to $191,000 because of higherpayroll costs associated with the hiring of an additional engineer and highertraining costs. Management does not anticipate an increase in the present levelof engineering expenses during the next few quarters.

 

Selling, general and administrative (SG&A)expenses increased 29%. The SG&A expenses of Torotel, Inc. increased 105%from $112,000 to $230,000 primarily because of a $30,000 increase in the valueof the Stock Appreciation Rights granted to non-employee members of the boardof directors, additional auditing fees of $25,000 absorbed in the first ninemonths of fiscal 2006,  $22,000 incurredfor preparation and mailing of the proxy materials and other costs associatedwith annual shareholders’ meeting, a $19,000 increase in professional feesassociated primarily with evaluating the proposed takeover of Torotel by PeterB. Caloyeras and the Caloyeras Family Partnership, a $10,000 increase indirectors fees for required board committee meetings and special telephonicmeetings held in conjunction with the proposed takeover, $7,000 incurred forpreparation of documents for electronic filing with the SEC, and a $5,000increase in costs for directors and officers liability insurance. The SG&Aexpenses of Torotel Products increased 18% from $723,000 to $854,000 primarilybecause of a $43,000 increase in training costs, higher payroll costs of $30,000,a $17,000 increase in fast-pay discounts taken by certain major customers, an $8,000increase in costs for repairs and maintenance, an $8,000 increase in salescommissions, an $8,000 recruiting fee for a new inside sales person, an $8,000increase in equipment rentals, a $5,000 relocation bonus for a new employee, a$5,000 increase in donations, a $5,000 increase in subscriptions to a military contractdatabase,

 

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a $3,000 increase in travel costs and a $3,000 increase in advertisingcosts. These increases were offset by a $12,000 decrease in property taxes. TheSG&A expenses of Electronika decreased 8% from $24,000 to $22,000. Managementdoes not anticipate an increase in the present level of SG&A expenses duringthe next few quarters.

 

Amortization costs, entirely attributable toElectronika, decreased 10% from $64,000 to $58,000 (see Note 6 of Notes toConsolidated Financial Statements).

 

Interest expense decreased 13%. The interest expenseof Torotel, Inc. remained unchanged at $39,000. The interest expense ofTorotel Products decreased from $63,000 to $50,000 because of a lower debtbalance.

 

There was no earnings impact in the first nine months offiscal 2006 from the investment in Apex. Equity in loss of investee was $139,000in the prior year.

 

Impairment of real estate increased $36,000 due toreducing the book value of the real estate held for sale in Grandview, Missourito its contracted price, less estimated selling and closing cost (see Note 9 ofNote to Consolidated Financial Statements).

 

Gain on settlement of debt increased because of the$35,000 gain that resulted from the settlement of an old liability at an amountlower than originally recorded.

 

Gain on sale of real estate increased because of the$110,000 net gain that resulted from the sale of the real estate parcelslocated in Grandview, Missouri (see Note 9 of Notes to Consolidated FinancialStatements).

 

For the reasons discussed above, the consolidatedpretax earnings increased from a loss of $123,000 to a profit of $418,000. Thepretax loss of Torotel, Inc. decreased from $290,000 to $234,000. Thepretax earnings of Torotel Products increased from $170,000 to $641,000. Thepretax earnings of Electronika increased from a loss of $3,000 to a profit of $11,000.

 

ThreeMonths Ended January 31, 2006 Compared With Three Months Ended January 31,2005

 

Net sales increased 22%. The net sales of Torotel Products increased 25% from $1,055,000 to $1,315,000. This increase is attributable to higher shipments of the potted coil assembly for the Hellfire II missile system and higher demand from other segments of the military. The net sales of Electronika decreased 13% from $70,000 to $61,000.

 

Gross profit as apercentage of net sales decreased nearly 4%. The gross profit percentage ofTorotel Products decreased nearly 4% due to higher material costs incurred oncertain products shipped to a major customer in the third fiscal quarter offiscal 2006 whereby the selling price was negotiated in 2002 as part of amulti-year price agreement that expires March 31, 2006. Torotel Productshas submitted new pricing for these products, which if accepted, will become part ofa new multi-year agreement. Electronika’s gross profit as a percentage of netsales remained unchanged.

 

Engineering expenses, applicable only to TorotelProducts, increased 38% from $50,000 to $69,000 because of the same reasons asoutlined above in the year-to-date engineering expenses comparison. Managementdoes not anticipate an increase in the present level of engineering expensesduring the next few quarters.

 

Selling, general and administrative (SG&A)expenses increased 17%. The SG&A expenses of Torotel, Inc. increased nearly38% from $40,000 to $55,000 primarily because of a $14,000 increase in thevalue of the Stock Appreciation Rights granted to non-employee members of theboard of directors. The SG&A expenses of Torotel Products increased nearly15% from $249,000 to $285,000 primarily because of a

 

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$19,000 increase in training costs, a $7,000 increase in fast-paydiscounts taken by certain major customers, a $5,000 increase in donations anda $5,000 increase in subscriptions to a military contract database. TheSG&A expenses of Electronika remained unchanged at $8,000. Management does notanticipate an increase in the present level of SG&A expenses during thenext few quarters.

 

Amortization costs, entirely attributable toElectronika, decreased 25% from $28,000 to $21,000 (see Note 6 of Notes toConsolidated Financial Statements).

 

Interest expense decreased 18%. The interest expenseof Torotel, Inc. remained unchanged at $13,000. The interest expense ofTorotel Products decreased from $20,000 to $14,000 because of a lower debtbalance.

 

There was no earnings impact in the current quarterfrom the investment in Apex. Equity in loss of investee was $63,000 in theprior year’s quarter.

 

For the reasons discussed above, the consolidatedpretax earnings increased from breakeven to a profit of $62,000. The pretaxloss of Torotel, Inc. decreased from $116,000 to $68,000. The pretaxearnings of Torotel Products increased from $110,000 to $123,000. The pretax earningsof Electronika increased from $6,000 to $7,000.

 

Liquidity and CapitalResources

 

The table below presents the summary of cash flow for the nine-month periods indicated.

 
| ** **                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Net cash  provided by (used in) operating activities |       | $        | 604,000    |     | $          | (321,000 | ) |
| Net cash  provided by (used in) investing activities |       | $        | 245,000    |     | $          | (32,000 | ) |
| Net cash used in  financing activities               |       | $        | (368,000   | )        | $          | (39,000 | ) |

 

Netcash provided by (used in) operating activities fluctuates between periodsprimarily as a result of differences in operating earnings, the timing ofshipments and the collection of accounts receivable, changes in inventory,level of sales and payment of accounts payable. The increase in net cashprovided by investing activities is because of the net proceeds of $317,000from the sale of the real estate parcels located in Grandview, Missouri. Capitalexpenditures were $72,000 during the first nine months of fiscal 2006. Managementanticipates approximately $90,000 in total capital expenditures for fiscal 2006.Net cash used in financing activities is because of payments on long-term debt,most of which came from the proceeds from the real estate sales. Managementbelieves that the projected cash flow generated from operations, combined withits existing cash balances, will be sufficient to meet its funding requirementsfor the foreseeable future. Torotel does have a $200,000 bank line of creditavailable, which could be utilized to help fund growth, if required.

 

Managementbelieves that inflation will have only a minimal effect on future operationssince such effects will be offset by sales price increases, which are notexpected to have a significant effect upon demand*.*

 

As stated in Torotel’s2005 Annual Report to Shareholders, Torotel’s board of directors has determinedthat Return on Capital Employed (“ROCE”) will be the primary tool for managingTorotel’s business. ROCE is measured by the following formula:

 
| **Earnings  before interest and taxes (EBIT)** | **X**      | **Net  Sales**                  | ** ** | **=**      | **ROCE**   |
|------------------------------------------------|------------|---------------------------------|------------|------------|------------|
| Net Sales                                      | ** ** | **Net  Operating Assets (NOA)** | ** ** | ** ** | ** ** |

 

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| Measures profit  and loss management              |   | Measures balance sheet management                             |
|---------------------------------------------------|--------|---------------------------------------------------------------|
|                                              |   |                                                          |
| Profitability %                                   |   | Activity rating                                               |
|                                              |   |                                                          |
| Measures how  much profit in each dollar of sales |   | Measures how much sales is generated from each  dollar of NOA |
|                                              |   |                                                          |
| Quality of  Revenue                               |   | Quantity of Revenue                                           |

 

Simply stated, ROCEmeasures what you get out (EBIT) versus what you put in (NOA = CapitalEmployed). For these purposes, NOA is defined as “accounts receivable +inventory + net fixed assets + miscellaneous operating assets – accountspayable – miscellaneous operating liabilities”. The performance of Torotel’smanagement and the majority of its decisions going forward will be measured by whetherTorotel’s ROCE improves. In fiscal 2003, 2004, and 2005, Torotel’s ROCE was3.52%, 1.46% and 5.84%, respectively. At January 31, 2006, Torotel’sannualized ROCE for fiscal 2006 is 22.73%.

 

Forward-LookingInformation

 

This report, as well as our other reports filed withthe Securities and Exchange Commission (“SEC”), and in press releases and otherpublic communications throughout the year, contains forward looking statementsmade pursuant to the safe harbor provisions of The Private Securities LitigationReform Act of 1995. The words “believe,” “estimate,” “anticipate,” “project,”“intend,” “expect,” “plan,” “outlook,” “forecast,” “may,” “will,” “should,” “continue,”“predict” and similar expressions are intended to identify forward lookingstatements. This report contains forward looking statements regarding, amongother topics, our expected financial position, results of operations, cashflows, strategy, budgets and management’s plans and objectives. Accordingly,these forward-looking statements are based on assumptions about a number ofimportant factors. While we believe that our assumptions about such factors arereasonable, such factors involve risks and uncertainties that could causeactual results to be different from what appear here. These risk factorsinclude: the ability to adequately pass through to customers unanticipatedfuture increases in raw material costs, impairment of intangible assets andinvestments, decreased demand for products, delays in developing new products,expected orders that do not occur, loss of key customers, the impact ofcompetition and price erosion as well as supply and manufacturing constraints,and other risks and uncertainties. In light of these risks and uncertainties,there can be no assurance that the forward-looking information contained inthis report will prove accurate, and our actual results may differmaterially from these forward looking statements. We assume no obligation toupdate any forward-looking statements made herein.

 

Item 3.                       Controls and Procedures

 

Torotel’s Chief Executive Officer and Chief FinancialOfficer (collectively, the “Certifying Officers”) are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rule 13a-15(e)) for Torotel. Such officers have concluded(based upon their evaluation of these controls

 

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and procedures as of a date within 90 days of the filing of thisreport) that Torotel’s disclosure controls and procedures are adequate andeffective for purposes of Rule 13a-14(c) in timely alerting them tomaterial information relating to Torotel required to be included in Torotel’sfilings with the SEC under the Securities Exchange Act of 1934. The CertifyingOfficers also have indicated that there were no changes during the periodcovered by this report in Torotel’s internal controls over financial reportingor other factors that have materially affected, or are reasonably likely tomaterially affect such controls, and there were no corrective actions withregard to significant deficiencies and material weaknesses.

 

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PART II.           OTHER INFORMATION

 

Item 4.                       Submission of Matters to a Voteof Security Holders

 

As described in Form 8-Kfiled with the Securities and Exchange Commission (the “Commission”) on September 21,2005, Torotel convened its annual shareholders’ meeting on September 19,2005, at its corporate headquarters in Olathe, Kansas. On the same day, theCaloyeras Family Partnership (NV), LLC (the “Caloyeras Partnership”) filed athird amendment to its joint Schedule 13D (the “13D/A”) filing with theCommission stating that the Caloyeras family was considering its options withrespect to possible amendments to Torotel’s articles and bylaws, the nominationof certain individuals to serve on the Torotel Board of Directors, and thepossible termination of the employment agreements of Torotel’s chief executiveofficer and chief financial officer.

 

Mr. Peter B.Caloyeras, who is the sole shareholder and president of the general partner ofthe Caloyeras Partnership, and who has the proxies to vote the Torotel sharesowned by the Caloyeras family and certain additional shareholders listed in the13D/A, and Mr. Basil P. Caloyeras, appeared at the annual shareholders’meeting and attempted to submit new resolutions for consideration at the annualshareholders’ meeting (collectively, the “Caloyeras Proposal”). On the groundsthat the Caloyeras Proposal was not properly presented in accordance with therequirements for submitting shareholder proposals for consideration at theannual shareholders’ meeting, as clearly articulated in Torotel’s proxystatement to shareholders filed with the Commission on August 19, 2005,and the Torotel Form 8-K dated April 26, 2005, with respect to theannual shareholders’ meeting, Torotel did not permit Messrs. Caloyeras topresent the Caloyeras Proposal for a vote of Torotel’s shareholders. Torotel’sannual meeting procedures require that shareholder proposals be submitted inadvance so that all shareholders have advance notice of proposals to beconsidered at the annual shareholders’ meeting.

 

After Torotel refused topermit consideration of the Caloyeras Proposal, Messrs. Caloyeras revokedtheir proxies and would not vote on any matter to come before the annualshareholders’ meeting. As a result, Torotel did not have a quorum for thepurposes of continuing the annual shareholders’ meeting under the MissouriGeneral and Business Corporation Act. Accordingly, the Company adjourned theannual meeting of shareholders until such time that a quorum may bepresented or represented at such meeting.

 

The Torotel Board ofDirectors had further discussions with the Caloyeras Partnership followingadjournment of the meeting and at various other times, and understands that theCaloyeras Partnership is considering making a proposal to acquire Torotel ifadequate funding can be obtained. Unless and until the Caloyeras Partnershiphas the financial means to pursue such a transaction, however, the TorotelBoard of Directors does not presently plan to spend additional companyresources or management time to discuss the terms of any proposed transactionwith the Caloyeras Partnership or explore any other strategic alternatives availableto Torotel. At this time, the Torotel Board of Directors believes that it is inthe best interest of Torotel and its shareholders to continue the employmentagreements of Torotel’s chief executive officer and chief financial officer andto focus management time and company resources on Torotel’s ongoing businessoperations.

 

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Item 6.                       Exhibitsand Reports on Form 8-K

 

a)                                                        Exhibits

 
| Exhibit 31.1 |   | Officer  Certification                                                                                                            |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 31.2 |   | Officer  Certification                                                                                                            |
| Exhibit 32.1 |   | Certification Pursuant to 18 U.S.C. Section 1350,  as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| Exhibit 32.2 |   | Certification Pursuant to 18 U.S.C. Section 1350,  as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

b)                   Reportson Form 8-K         There wereno reports filed on Form 8-K during the three months ended January 31,2006.

 

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SIGNATURES

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| Torotel, Inc.              |                 |
|---------------------------------|----------------------|
| (Registrant)                    |                 |
|                            |                 |
|                            |                 |
| /s/ Dale H.  Sizemore, Jr. |                 |   |
| Dale H. Sizemore, Jr.      |                 |
| Chief Executive  Officer        |                 |
| Date:                           | March 10,  2006 |
|                            |                 |
| /s/ H. James  Serrone           |                 |   |
| H. James Serrone                |                 |
| Chief Financial  Officer        |                 |
| Date:                           | March 10,  2006 |
|                                 |                      |  |  |  |

 

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